Toronto's real estate market is one of the most expensive markets to invest in across the country, so is it time to bail out and invest in other cities? Not yet.....One way you can buy an investment property in Toronto is through the B.A.R strategy: Buy, Add Value, Refinance.
It's a strategy I have personally used in buying an investment property.
There are 5 types of investment properties:
Turn key: ready to go and all done up
Cosmetic touch-up: needs to a bathroom or kitchen to be updated, maybe some paint, etc.
Gut renovation: Dated property that requires a complete update
Change of use: turning single family home into a duplex, or duplex into triplex
Land assembly / rezoning: developers operate in this space
The B.A.R strategy is applicable for change of use where value and additional income suite is added (forced appreciation). Here is how it works:
The real estate investor would buy a single family home (eg. semi-detached), completely gut it if it is dated and add a legal second income suite in the basement. Once the renovations are completed and the investment property is ready to be rented, the real estate investor would refinance the investment property to recoup the renovations capital.
There are a few factors to consider upfront when embarking the more sophisticated approach of "change of use":
Work with an architect upfront to identify what needs to be done to the property to meet building and fire code for a secondary unit. An application to committee of adjustment might be required for variances to building code
Understand budget required to add secondary unit, what renovated properties are selling / can be appraised for in order to determine how much of your capital will be recouped after refinancing the investment property. Having an investment property focused Real Estate Broker who is an investor as well
A great General contractor can make or break the project. Delivering the renovations on time and as close as possible to the budget is paramount
Team approach: Having a good architect, contractor, mortgage broker, accountant and Real Estate Broker who understand real estate investing (the real estate investor board of directors) is very helpful in guiding the real estate investor through this strategy
Case Study: Semi-detached located in Wychwood / Hillcrest Village area
Closing: the semi-detached was generating $2200 revenue from one tenant Renovation Budget: $175k to update main floor & upstairs and add legal basement suite Timeline: 6 months to complete project and get the duplex rented (there is a strategy I have utilized when buying an investment property to start work prior to closing which shortens the overall timeline) Post Renovations: The investment property was refinanced few months after tenants moved in to recover renovations capital. The refinance timing is driven by comparables in the marketplace. Revenue: Gross rental income was over $4000 per month Math: For every $100k borrowed, it's equivalent to $500 monthly mortgage payment. Adding $200k (renovations + carrying costs during renovations + refinance costs) in debt, the investment property generated an additional $1800 of rental income which more than covers the additional $1000 monthly mortgage payment. Example: Buy an investment property for $800k with 20% downpayment ($160k), after renovating it for $200k, refinance the property at $1 million to get back the $200k capital put into it. This puts the real estate investor at 16% downpayment ($160k into a $1million investment property). Having strong cash flow is key to sustain the total mortgage debt.
There are other ways to buy an investment property in Toronto. Yes, it is more expensive nowadays, keep in mind a city with a diverse economy (jobs, jobs, jobs): Government, health care, banking, investments, film industry, high tech / IT, etc... and strong migration bodes well for the long term health of the housing market. Invest in real estate and wait...
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